the financial impact of erp architecture on the annual ...the financial impact of erp architecture...
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February 2014, IDC #246542
WHITE PAPER
The Financial Impact of ERP Architecture on the Annual Cost of Business Change
Sponsored by: UNIT4
Michael Fauscette
February 2014
IDC OPINION
Purchasing enterprise resource planning (ERP) systems is a complex process that involves both
meeting business functional needs and mitigating the longer-term expense of keeping the system up to
date and optimized for supporting critical business changes. In a survey conducted in the spring of
2013, IDC found that the ongoing investment to keep systems in sync with changing business needs
and requirements can be substantial, particularly when the systems that must be changed to support
the business are built on inflexible architectures. The results of that survey were published in the
May 2013 IDC White Paper Maintaining ERP Systems: The Cost of Change and included the following
key findings:
Meeting changing business requirements requires moderate to substantial underlying ERP
system changes.
ERP system change issues are not being resolved by newer ERP systems.
Customizations, often necessary during the implementation of ERP systems, have long-term
risks and implications for ongoing system maintenance.
Many companies choose to suffer with managing more than one ERP system rather than deal
with the complexity and costs of consolidation to one system.
Because of business changes, 15% of the respondents were forced to reimplement the entire
ERP system. Of those, 60% had initially spent over $2.5 million.
The cost of system modifications not only is direct but also includes a substantial amount of
lost productivity.
The average annual cost of maintaining ERP systems and meeting changing business needs
is up to $1.2 million, but in the extreme, it can exceed $4.1 million per year.
The frequency of change and subsequent investment to make the ERP system support the
business has become so common that many businesses simply accept that there is no better
way to operate the business.
©2014 IDC #246542 2
In this follow-on survey, IDC asked the same questions of a sample of UNIT4 Agresso ERP customers.
The surprising results are as follows:
Meeting changing business requirements requires substantially less system change for the
UNIT4 ERP customers than for the average ERP customers. UNIT4 customers are more likely
to report only minor to moderate changes versus moderate to substantial changes.
UNIT4 Agresso customers appear to keep the system longer or to have made fewer major
ERP shifts in the past one to nine years than their peers.
The overall initial system costs are reasonably consistent across both populations, but the
general ERP customer population needed to do more moderate to substantial customizations
to meet implementation needs.
While all respondents reported making system changes since implementation, the UNIT4
Agresso users reported changes that are indicative of adding new apps, modules, features,
and functions rather than spending time on changes to already implemented software. This is
important from an innovation perspective because spending time on keeping existing software
current clearly takes away from initiatives related to expansion and growth.
The general ERP users were four times as likely as UNIT4 Agresso ERP users to report
negative impact on customer experience as a major obstacle to keeping ERP systems current
to meet changing business requirements.
The reported average annual costs of change (internal and external costs) are substantially
higher for the general population than for UNIT4 Agresso customers. UNIT4 customers
reported spending an average of 55% less on an annual basis.
IDC believes that the survey shows clearly that beyond fit and value, companies must look for
ERP systems that can provide the flexibility to continue to meet business needs with low
investment of scarce company resources.
Methodology
IDC developed this white paper based on a survey of 77 executives at UNIT4 customers across North
America and Europe to gain insight into their company's use and ongoing maintenance of ERP
systems. The survey is identical to a survey conducted in the spring of 2013 of 167 executives from the
general ERP population (reported in the IDC White Paper Maintaining ERP Systems: The Cost of
Change published in May 2013). Table 1 presents respondents by company size. Tables 2 and 3
present respondents by job title and industry, respectively.
©2014 IDC #246542 3
TABLE 1
Respondents by Company Size (% of Respondents)
Q. What is your company's total revenue for the most recent fiscal year in USD?
Total Revenue Average ERP UNIT4 ERP
<$100M 15.0 41.6
$100M–249M 25.1 28.6
$250M–499M 15.0 13.0
$500M–999M 20.4 10.4
$1B+ 24.6 6.5
n = 167 77
Source: IDC, March 2013 (Average), October 2013 (UNIT4)
TABLE 2
Respondents by Job Title (% of Respondents)
Q. Which of the following most closely describes your job title?
Job Title Average ERP UNIT4 ERP
Other 0.0 50.6
Controller 8.4 18.2
Director/manager of finance 28.7 16.9
Chief financial officer (CFO) 12.6 10.4
CEO, president, managing director 18.6 2.6
EVP/SVP/VP of finance 8.4 1.3
Chief operations officer (COO) 22.8 0.0
Treasurer 0.6 0.0
Consultant 0.0 0.0
n = 167 77
Source: IDC, March 2013 (Average), October 2013 (UNIT4)
©2014 IDC #246542 4
TABLE 3
Respondents by Industry (% of Respondents)
Q. In what industry does your company earn the majority of its revenue?
Industry Average ERP UNIT4 ERP
Public sector/nonprofit 4.8 41.6
Education/research 7.2 13.0
Other 0.0 9.1
Business/professional service 10.8 5.2
Healthcare 6.0 5.2
Media/entertainment/travel/leisure 2.4 5.2
Chemicals/energy/utilities 3.0 3.9
Industrial/manufacturing 14.4 3.9
Transportation/warehousing 6.6 3.9
Financial services/real estate/insurance 10.8 2.6
Aerospace/defense 0.0 1.3
Construction 7.8 1.3
Food/beverage/consumer packaged goods 0.6 1.3
High tech 12.6 1.3
Pharmaceuticals/biotechnology/life science 1.2 1.3
Telecommunication 3.0 0.0
Wholesale/retail trade 9.0 0.0
n = 167 77
Source: IDC, March 2013 (Average), October 2013 (UNIT4)
©2014 IDC #246542 5
SITUATION OVERVIEW
ERP systems are the technology backbone of the modern business, and as such, the process of
matching the "right" system to specific business needs is extremely critical. Most companies spend
quite a bit of scarce resources (time and money) on defining the business requirements and then
evaluating the potential systems for a close functional fit and for the potential up-front (implementation
and license) costs. Our general ERP survey from March 2013 showed that these efforts are falling
short on one very important issue: They do not account for the adaptability and flexibility of the
selected systems to support the ongoing process of keeping the required functionality and features
matched to changing business needs and requirements.
If you purchased the system on a perpetual license model and implemented the system, you have
ongoing annual maintenance and datacenter operational costs as well as an ongoing investment in
people. If a business buys on a subscription model, or hosts the software with a hosting provider, it has
ongoing subscription or hosting fees as well as administrative costs. Unfortunately, though, these are
not the only ongoing "costs" to operate an ERP system. Companies must respond to business
changes such as:
Regulatory requirement changes
Company reorganizations and restructuring
New or modified business processes
Financial management–driven changes (e.g., meeting new accounting rules)
Mergers and acquisitions (M&As)
In the initial study, IDC found that in general the vast majority of ERP systems are not designed to be
flexible and easily adapted to accommodate system changes driven by business changes. Rather, the
systems were designed to provide and automate repeatable business processes, providing important
business benefits but at the same time creating system architecture rigidity that plagues ongoing
operations. This results in substantial ongoing investment to keep the system current. These business
factors impacted both respondent populations equally of course (see Figure 1).
©2014 IDC #246542 6
FIGURE 1
Changes Since Initial Implementation
Q. What kind of changes has your company made to its ERP system since the initial
implementation was completed?
Source: IDC, March 2013 (Average), October 2013 (UNIT4)
As Figure 1 illustrates, both groups made a substantial number of system changes to meet changing
business conditions. While overall change statistics were fairly consistent, there are some interesting
differences in the data from each group of respondents. There are some significant differences in the
types of changes reported by the UNIT4 customers and the general population. The UNIT4 customers
reported changes that tend to focus on "new" opportunity, not just on "fixing" the existing systems. In
other words, a good number of changes by the UNIT4 respondents provided the business with new
applications, new modules, new features, and new functionality, something that is indicative of
business growth and expansion, not just of maintaining the status quo.
0 10 20 30 40 50 60 70 80 90
Reimplemented entire ERP system
Consolidated from many ERP systems to one ERP system
Integrated with other apps
Modified existing apps/modules
Added new apps/modules/features
(% of respondents)
Average ERP (n = 167)
UNIT4 ERP (n = 77)
©2014 IDC #246542 7
So did the UNIT4 customers report any differences in the ongoing efforts to meet the business
changes? Does the arguably more flexible UNIT4 Agresso architecture lead to less painful/costly
changes to the underlying technical infrastructure to keep pace with organizational flux? Figure 2
compares the moderate to substantial business changes reported by users of the average ERP
system versus UNIT4 ERP respondents. Keep in mind that the reported changes mentioned previously
(refer back to Figure 1) are relatively consistent across the entire set of possible changes, and yet the
amount of change is substantially different.
FIGURE 2
Moderate to Substantial ERP System Changes Driven by Business Factors:
Average ERP Versus UNIT4 ERP
Q. When modifying your company's ERP system for one of the listed business factors, what level
of effort was required?
Source: IDC, March 2013 (Average), October 2013 (UNIT4)
0 10 20 30 40 50 60 70 80 90
Regulatory requirements
M&A
Reorganize or restructure
Financial management driven
New/changed business process
(% of respondents)
Average ERP (n = 167)
UNIT4 ERP (n = 77)
©2014 IDC #246542 8
There's quite a bit of difference between the changes in each group for the business factors
themselves, but what about the underlying technology? Figure 3 shows the changes in each group
around underlying data structure, business rules, business processes, user permissions, security and
access controls, and reporting, analytics, and data visualization.
FIGURE 3
Moderate to Substantial ERP System Changes Driven by Technical Factors:
Average ERP Versus UNIT4 ERP
Q. When modifying your company's ERP system for one of the listed technical factors, what level
of effort was required?
Source: IDC, March 2013 (Average), October 2013 (UNIT4)
Figure 3 highlights the underlying system changes necessary to meet new business requirements and
is a good indicator of the rigidity of the architecture of many ERP systems. As the figure illustrates, the
UNIT4 Agresso customers reported requiring notably less IT modification, particularly in the underlying
data structure and in the related area of analytics and reporting. The implications of this survey data
then are that the higher flexibility of the UNIT4 architecture more easily accommodates changes that
would impact the underlying data structure, an area that is particularly complex and expensive to
modify in many systems. The other implication is that the UNIT4 approach to reporting and analytics is
much more end-user configurable and thus not as susceptible to the need to involve expensive IT
resources for making and supporting reports and analytics that provide the information necessary to
support important business decisions.
0 20 40 60 80
Underlying data structure
Reporting/analytics/data visualization
User permissions, security, access controls
Business rule change
Business process change
(% of respondents)
Average ERP (n = 167)
UNIT4 ERP (n = 77)
©2014 IDC #246542 9
Obstacles to Successful System Modifications
The survey also looked at the major obstacles to making successful system modifications to meet the
changing business requirements (see Figure 4). Many categories were included, such as cost and
complexity, business disruption, and technology risks. While all respondents met these obstacles to varying
degrees, three areas emerged as significantly different between the average ERP user and the UNIT4 user.
FIGURE 4
Major Obstacles to Successful System Modifications
Q. In your experience, which, if any, of the following factors have been major obstacles to
successfully modifying your company's ERP system?
Source: IDC, March 2013 (Average), October 2013 (UNIT4)
ERP change for many companies seems to have challenges both at the onset and through the completion
cycle of the needed change. Difficulty in building the business case and defining the return on investment
(ROI) is perhaps related to ongoing and past issues that plague some IT project teams as they have tried
to keep the ERP systems current. The data implies a level of skepticism in some businesses based on
past negative results, with ERP modifications required to meet the changing business needs.
Even more troubling than ROI justification, though, is the potential disruption to financial processes
that can be caused by ERP system modifications. The business risk associated with this type of
disruption can be very high, delaying and impeding financial close processes and even negatively
impacting a far-reaching set of business processes outside of finance such as customer service,
partners, and even regulatory compliance.
Negative impact on customer experience, which shows the greatest difference between the two groups, is
by far the most troubling of the obstacles. The high level of concern among the general ERP population
over the potential of negatively impacting customer experience would most likely indicate a history of
negative past change results. In fact, the negative customer experience of the general ERP user population
was four times higher than that of the UNIT4 Agresso customers. In a business environment where
0 5 10 15 20 25 30
Negative impact on customer experience
Disruption of financial processes
Difficulty building business case/defining ROI
(% of respondents)
Average ERP (n = 167)
UNIT4 ERP (n = 77)
©2014 IDC #246542 10
customer experience is, by necessity, top of mind for every business, it is likely that the implied negative
bottom-line impact of ERP system change is a significant inhibitor to keeping ERP systems current. It is
also likely that this type of negative impact has at least lowered customer satisfaction in the past and may
even be directly responsible for bottom-line issues for some businesses. In this case, it would seem that
system flexibility might even translate into improved end-customer experience for the business.
Costs of Change
In the initial study, IDC discovered that the ongoing cost of maintaining and operating most ERP
systems is substantial. Table 4 shows the data from that survey.
TABLE 4
Average Cost of Change by Cost Category: Average ERP ($)
Q. Estimate the ongoing annual costs of maintaining and modifying your company's ERP system.
Category of expense Average ERP
Internal costs 288,029
External costs 276,542
n = 167
Source: IDC, March 2013
In the second study, IDC collected the same data for the UNIT4 ERP customers. Table 5 shows their
responses.
TABLE 5
Average Cost of Change by Cost Category: UNIT4 ERP ($)
Q. Estimate the ongoing annual costs of maintaining and modifying your company's ERP system.
Category of expense UNIT4 ERP
Internal costs 145,955
External costs 108,064
n = 77
Source: IDC, October 2013
©2014 IDC #246542 11
In comparing the internal and external annual costs of change, we found that the average ERP
(non-UNIT4) customers reported an average of $564,571 of internal and external annual costs. The
UNIT4 Agresso customers reported $254,019, or an annual savings of 55%. In Table 6, the internal
and external cost data is broken out by company size and a subset of the data excluding the
companies with <$100M is shown in the bottom row of table 6. This comparison shows that there is no
significant difference in the savings in each size band versus the overall 55%.
TABLE 6
Comparison of Annual Internal and External Cost Data by Company Size
Q. Estimate the ongoing annual costs of maintaining and modifying your company's ERP
system.
Company
Size
Total Internal + External Costs
per Year Average ERP ($) n =
Total Internal + External Costs
per Year UNIT4 ERP ($) n = Total Savings (%)
<$100M 533,693 25 225,190 32 58
$100M–249M 572,022 42 258,577 22 55
$250M–999M 533,757 59 266,740 18 50
$1B+ 618,384 41 373,749 5 40
Total 564,571 167 254,019 77 55
Total
excluding
<$100M
561,600 142 274,639 45 51
Source: IDC, March 2013 (Average), October 2013 (UNIT4)
CONCLUSIONS
Modern ERP systems are a business necessity, delivering process automation and business insight, but
the initial study conducted by IDC found that the systems require a high level of both short-term
investment and long-term investment. The up-front investment in purchasing and implementing the
system is only a small part of the real and ongoing costs. Meeting changing business needs and modifying
the ERP systems to enable those changes can require substantial effort and costs. If these costs were a
rare occurrence, it might be acceptable to maintain inflexible systems. Unfortunately, though, the original
survey shows that meeting business change is an ongoing and regular activity that carries a very high
annual average costs of $1 million or more for the average ERP customer. For UNIT4 Agresso customers
however, the survey painted a very different picture. Organizations for both groups experienced the same
business change requirements, but the types of changes, the costs, and the business risks were different
for UNIT4 customers. Specifically:
©2014 IDC #246542 12
Meeting changing business requirements requires substantially less system change for the
UNIT4 ERP customers than for the average ERP customers. UNIT4 customers are more likely
to report only minor to moderate changes versus moderate to substantial changes.
UNIT4 Agresso customers appear to keep the system longer or to have made fewer major
ERP shifts in the past one to nine years than their peers.
The overall initial system costs are reasonably consistent across both populations, but the
general ERP customer population needed to do more moderate to substantial customizations
to meet implementation needs.
While all respondents reported making system changes since implementation, the UNIT4
users reported changes that were indicative of adding new apps, modules, features, and
functions rather than spending time on changes to already implemented software. This is
important from an innovation perspective because spending time and resources on keeping
existing software current clearly takes away from initiatives related to expansion and growth.
The general ERP users were four times as likely as UNIT4 ERP users to report negative
impact on customer experience as a major obstacle to keeping ERP systems current.
The reported average annual costs of change (internal and external costs) are substantially
higher for the general population than for UNIT4 customers. UNIT4 customers reported
spending an average of 55% less on an annual basis.
Both studies show that when evaluating the costs of an ERP system, organizations must look at
more than the up-front implementation and licensing investment. The ongoing maintenance and costs
to keep the system in sync with business needs can be substantial and must be a large consideration
— ranking close to overall functional fit itself — in the purchase decision. Meeting the business
requirements is critical of course, but the system must be flexible and adaptable enough to continue to
meet those needs for many years without being a drain on precious resources. Flexibility and
adaptability then are key features for evaluating and selecting ERP systems.
About IDC
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